Daily Management Review

Dealmakers At Goldman Sachs Anticipate A Rebound In M&A Activity In The Second Half Of 2023


Despite a slowing in economic growth and a weak credit market, Goldman Sachs Group Inc's top dealmakers are optimistic about a recovery in global mergers and acquisitions (M&A) in the second half of 2023.
As economic forecasts become more pessimistic, executives at the Wall Street powerhouse, including Dan Dees and Jim Esposito, who jointly run its global banking and markets division, said they are ready for a recovery when financing markets ease, which could happen as soon as the second half of 2023.
According to Dealogic data, global M&A values fell 36% to $3.78 trillion in 2022, down from a record $5.91 trillion in 2021. Banks, including Goldman Sachs, have cut jobs as the economy slows.
Top Goldman dealmakers who have been with the firm for more than two decades each told Reuters in recent weeks that there are plenty of reasons for global deal activity to pick up.
Big investors have piles of cash ready to fund transactions, and large companies with solid profits are looking to diversify their businesses - but they are waiting for economic uncertainty to fade, according to bankers.
"I remain quite bullish, maybe not on the first quarter, but certainly as we go forward," said Stephan Feldgoise, global co-head of M&A. Still, there are "clear headwinds in the first part" of 2023, he said.
Feldgoise's London counterpart, Mark Sorrell, sees corporate clients jumping on deals when financing is available because their underlying motives, such as gaining new customers, new products, or geographic expansion, remain intact.
Companies are staying on the sidelines because their creditors are hesitant to make riskier loans for buyouts as interest rates rise, but this could change quickly, according to him.
"When the financing market comes back, we don't know when it will happen, but it will happen because of the amount of liquidity in the system, we think transaction volumes will and activity will recover," Sorrell said.
The resurgence may be "quicker than people expect," he says.
Goldman's investment bankers stand to benefit if markets recover. According to Dealogic data, the company has been the top global M&A adviser by revenue for the past 20 years, followed by JPMorgan Chase & Co.
Despite this, Goldman is not immune to a downturn. Its investment banking division accounted for only 13% of total revenue in the third quarter, down from 27% a year ago and 23% in the third quarter of 2018, when CEO David Solomon took over.
According to Reuters, the bank is planning to lay off thousands of employees in the coming year, adding to an earlier round of about 500 layoffs in September. Bonuses will be reduced as well.
Goldman executives stated that staffing levels were being adjusted to reflect the economic environment, and that employees were being reassigned to more active areas in some cases.
According to Russ Hutchinson, the bank's chief operating officer of global M&A, the bank sees opportunities in advising clients who are being pursued by activist investors or fintech companies that are open to suitors after their valuations have plummeted.
The fortunes of Wall Street's dealmakers are heavily reliant on whether the leveraged loan market recovers from a lull last year. Some observers have drawn parallels to the global financial crisis, when falling corporate valuations and a recession caused by a housing market collapse froze the leveraged buyout (LBO) market.
According to Esposito, Goldman's co-head of global banking and markets, the current credit market stress is vastly different from that of 2008. At its peak during the crisis, the banking industry had over $700 billion in stalled LBO exposure, which took 12 to 18 months to clear.
Today, "there's probably between $100 and $125 billion ... In comparison to 2008, the figure is almost insignificant, and the credit markets are much deeper."
Because of market stress, lenders are less willing to finance deals because they are saddled with tens of billions of dollars of "hung debt" that they cannot sell to investors.
Despite the market turmoil, Goldman veterans remain optimistic.